FCA may clamp down as millions take pension cash early

The Financial Conduct Authority (FCA) has identified areas where ‘early intervention’ may be needed within the retirement income market, as a result of substantial changes following the introduction of pensions freedoms.

In the interim findings of its Retirement Outcomes Review, the regulator found 53% of pension pots accessed by consumers since the rules came into force in April 2015 were fully encashed, however 90% of those were below the value of £30,000.

In addition, 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension, the FCA found.

However, the regulator also revealed 52% of fully withdrawn pots were not spent but were moved into other savings or investments.

Some of this was due to a lack of public trust in pensions, it said, warning this could result in “consumers paying too much tax, missing out on investment growth or losing out on other benefits.”

The new norm
Accessing pension pots early has become ‘the new norm’, the FCA said.

Almost three quarters (72%) of pots that have been accessed were by consumers under the age of 65, most choosing to take lump sums rather than a regular income.

As was to be expected, drawdown has become much more popular under the reforms. Twice as many pots are now moving into drawdown than annuities, the FCA said.

However, consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared with 30% now, according to the FCA.

The regulator warned consumers may need more support and protection with drawdown being a complex product.

In addition, consumers who accessed their pots early without taking advice typically followed the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around, which could be detrimental.

Product innovation has also been limited to date, particularly for the mass market, the FCA said.

Additional protections
The regulator is looking to assess whether additional protections should be put in place for consumers who buy drawdown without advice.

“We will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies,” is said.

It is also exploring ways to improve competition in non-advised drawdown by asking government to consider to enable consumers to access their savings early without having to make a decision about the remainder of their pot.

At the same time it wants to make it easier to compare and shop around for drawdown.

It wants to introduce tools and services to help consumers understand their options after the pension freedoms building on existing initiatives such as the free guidance provided by Pension Wise.

Executive director of strategy and competition Christopher Woolard said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.

“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across government, regulators, the industry and consumer bodies.”

Launched in July 2016, the review is the first major comprehensive study into how the retirement income market is changing since the pension freedoms.

The FCA is inviting feedback on the initial findings and recommendations and aims to publish a final report in the first half of 2018.